Press Release

DBRS Downgrades Ratings of AltaGas Ltd.

Utilities & Independent Power
December 21, 2018

DBRS Limited (DBRS) downgraded the Issuer Rating and the Medium-Term Notes (MTNs) ratings of AltaGas Ltd. (AltaGas or the Company) to BBB (low) from BBB, and the Preferred Shares - Cumulative rating to Pfd-3 (low) from Pfd-3. The trends on the ratings are now Stable.

The downgrade removes the ratings from Under Review with Developing Implications where they were initially placed following the announcement that the Company had agreed to acquire WGL Holdings Inc. (WGL) in January 2017. Please refer to the DBRS press releases “DBRS Places AltaGas Ltd. Under Review with Developing Implications Following Announcement of WGL Holdings Acquisition,” January 26, 2017; “DBRS Maintains AltaGas Ltd. Under Review with Developing Implications,” November 6, 2017; and “DBRS Comments on AltaGas Ltd. Closing Its Acquisition of WGL Holdings, Inc.,” July 9, 2018.

DBRS’s rating action reflects the significant structural subordination and the weaker credit profile of the Company. Stand-alone debt at AltaGas is structurally subordinated to debt at its subsidiaries: WGL, Washington Gas Light Co. (Washington Gas) and SEMCO Energy, Inc (SEMCO). As at Q3 2018, $6.4 billion of debt at AltaGas, the parent, was subordinated to $3.5 billion of debt at WGL (including $1.8 billion at Washington Gas) and $469 million at SEMCO. Although the acquisition has added scale and diversification to the Company’s utility footprint in the United Sates, it does not mitigate the structural subordination caused by the acquisition. Following the close of the WGL acquisition, certain ring-fencing provisions were implemented whereby Washington Gas became a wholly owned subsidiary of a bankruptcy-remote entity, Wrangler SPE LLC, to insulate the utility and protect it from the financial policies of AltaGas and the financial risk from the rest of the Company’s operations, including the non-regulated operations of WGL. Regulatory conditions for the acquisition provide for restrictions on dividends should equity level fall below 48% of total capitalization at Washington Gas and a restriction on special dividends for the next three years. DBRS is of the opinion that while these ring-fencing provisions are credit positive for Washington Gas, they are credit negative for AltaGas, the parent.

DBRS notes that the credit profile of AltaGas has weakened since the sale of its unencumbered and contracted Northwest B.C Hydroelectric facilities, the San Joaquin gas-fired generation facilities in California and the monetization of its Canadian utility assets through the IPO of AltaGas Canada Inc. (rated BBB (high), Stable by DBRS) to primarily fund the acquisition of WGL. The acquisition of WGL has resulted in higher debt at AltaGas: non-consolidated debt at the parent company was $6.4 billion at Q3 2018 compared with $3.6 billion at Q3 2017. DBRS estimates that the non-consolidated debt-to-capital ratio at AltaGas was approximately 50% at Q3 2018, which is considered high. As part of the funding plan for the acquisition of WGL, the Company completed the sale of $2.4 billion of assets in 2018 with an additional $1.5 billion to $2.0 billion of asset sales to be completed in the first half of 2019, including the remaining 55% interest in the Northwest B.C. Hydroelectric facilities for $1.39 billion that is expected to close in Q1 2019. The Company recently announced additional asset sales of $1.5 billion to $ 2.0 billion and a 56% dividend cut to repay debt and to fund capex in 2019. DBRS is of the view that should the execution, timing and amount of asset sales not materialize as contemplated, the Company’s leverage could remain high and further pressure its credit profile. DBRS notes that the Company has indicated that new debt and debt maturities at WGL (excluding Washington Gas) will be funded at the parent company, while the utilities, Washington Gas and SEMCO, are expected to access the debt markets directly.

DBRS expects the Company’s high capex program to continue in the medium term. The Company’s capex for 2019 is expected to be approximately $1.3 billion (approximately $1.2 billion in 2018), largely for capital projects in the utility and midstream segments. The high capex commitments, especially at the Company’s regulated utilities, will require debt issuance at Washington Gas and SEMCO and an equity infusion from AltaGas to maintain the regulatory capital structure at Washington Gas. DBRS is of the opinion that upstream dividends from the regulated utilities to WGL and AltaGas will need to be recycled back to partly fund the equity infusion. DBRS expects the debt level at Washington Gas to rise in the next two to three years, resulting from its capital programs. DBRS expects consolidated debt levels to decline with the proceeds of asset sales in 2019 and gradually rise in the 2020-2022 period as the Company continues to execute on its medium-term capital program.

While an upgrade to the rating is not contemplated in the near term, DBRS could consider upgrading the rating should the Company’s consolidated debt-to-capital ratio improve and stay at or below the 40% level for a sustained period while AltaGas executes on its capital programs. DBRS could revise the rating down should (1) consolidated debt-to-capital remain at or above 50% for a sustained period; (2) the Company fails to execute on the planned asset sales in 2019; or (3) adverse regulatory changes at Washington Gas or SEMCO affect the Company’s business risk profile.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info@dbrs.com.

The principal methodologies are Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry (September 2018); Rating Companies in the Pipeline and Diversified Energy Industry (November 2018); DBRS Criteria: Rating Corporate Holding Companies and Their Subsidiaries (November 2018); and DBRS Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (November 2018), which can be found on dbrs.com under Methodologies & Criteria.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.

Ratings

AltaGas Ltd.
  • US = Lead Analyst based in USA
  • CA = Lead Analyst based in Canada
  • EU = Lead Analyst based in EU
  • UK = Lead Analyst based in UK
  • E = EU endorsed
  • U = UK endorsed
  • Unsolicited Participating With Access
  • Unsolicited Participating Without Access
  • Unsolicited Non-participating